Economics

The silent treatment

TIM WORSTALL is mildly vitriolic on the subject of Britain's Tories, who are apparently mulling outlawing contract clauses forbidding employees to discuss their salaries with others. This is supposed to help eliminate gender disparities.

This may well be a stupid idea—though in its favour is the fact that women in America apparently tend to end up with lower salaries simply because they don't negotiate on initial offers. Presumably, if they quickly realised they'd been lowballed, they would attempt to rectify this.

But the discussion actually ignores what to me is the interesting point: why don't employees share more salary data? As far as I know, my employer does not forbid me to disclose what I earn, but I would sooner disclose my weight, body fat percentage, and Grandmother's secret pound cake recipe, than tell my coworkers what I make.

Presumably, this makes labour markets less efficient, since I don't have any very good idea what I'm worth, other than what my employer has offered to pay me. (In my case, of course, this is undoubtedly within a tenth of one percent of my actual value—we're big believers in efficient markets here—but in many cases, I imagine that workers have a skewed idea of what they're worth. At least until they rise so high that they are frequently actively recruited by headhunters.

So why don't employees disclose? Possibilities:

1) It is a cultural hangover from a time when most people were self-employed in small communities; bragging about your wealth was a good way to foster resentment and/or begging from relatives, with no clear upside.

2) It is unnecessary: everyone can roughly guess what you make by your lifestyle. In an age of easy credit, I find this unlikely.

3) The people who we want to disclose are the high earners, who are unlikely to do so. Doing so risks the revelation that they are overpaid, or a general levelling of salaries that leave fewer wages for them. Since people tend to erroneously believe that they are above average, everyone resists sharing their salary in the belief that they will be the ones hurt by any levelling.

4) Everyone will be embarassed: the high earners by jealousy and allegations that they aren't worth it; the low earners by the revelation that the company values them so little. There is no upside.

Another possibility is that open salaries would actually be good for employers, spurring competition between employees in much the way that open posting of grades spurs frantic activity at the top of the class. Again, why might they decline to disclose?

1) Everyone believes that they are systematically underpaying their employees

2) It would be terrible for morale, forcing an unproductive flattening of salaries

3) Everyone knows that they are unfairly overpaying some employees

4) It would enable competitors to systematically poach underpaid talent

Readers' comments

But people do disclose salaries in anonymous surveys. The results of those surveys are statistically more valid and, so, more useful in determining one's market value than knowing what the guy in the next office makes. My wife works for a state university, and all of the salaries are public information and get passed around every year in a big excel spreadsheet. As far as I can tell, though, it doesn't seem to really have that much of an effect on workplace dynamics. Comment originally posted on February 7, 2007 12:30 AM

It's certainly explanation 4 in my experience: mutual embarrassment and the lack of an upside. It compares almost exactly to the following problem... discussing with a spouse how many people (if any) they slept with before they met you. You want to know, but yet you don't. You want to tell, but then, that doesn't gain you anything. I would happily work at a firm that had mutual disclosure. But when working in a firm that doesn't, why break the silence? If I am dealt the lowest poker hand on a table, asymmetric information and bluffing skills are the only things working in my favour. Why give them up?Comment originally posted on February 5, 2007 4:29 PM

On a human note, the first day it was implemented would be fascinating! There is also the question of what organisations should be required to disclose. Rather interesting would be just letting everyone know which staff got performance bonuses (or even a breakdown of gender/seniority). This was published quietly in my public sector organisation once showing (surprise, surprise) that men did better than women and that the more senior you were, the higher chance of getting a bonus. The exercise was not repeated. As pay seems to be becoming more flexible, the question of what information should be supplied by the organisation is rather relevant.Comment originally posted on February 6, 2007 11:30 AM

Another interesting fact to think about: disclosure of CEO compensation, while causing public outrage in some instances, hasn't reduced compensation. It has increased it: firms do not like the idea of recruiting a "below average" CEO, and no CEO likes to think of himself as "below average". Hence rampant growth in CEO pay, even after adjusting for performance.Comment originally posted on February 6, 2007 5:08 AM

SIR - There is one particular market where every employee knows what every other employee makes, so long as the given employee's years out of school are known. This is the "biglaw" market in major US cities. 1st year associates in New York make $145k, though some firms raised these salaries to $160. Websites such as www.infirmation.com, and "greedy associate" boards offer anonymously submitted salary information for most major law firms. The availability of such information enables a sort of collective action by would be associates, and keeps firms from lagging behind those who are first to raise. This, in my opinion, has helped power the dramatic increases in associate salaries over the past few years. Maybe, therefore, it can benefit employees in other industries, such as journalism, for instance, to make their salaries more public. Comment originally posted on February 5, 2007 6:58 PM

As is usual with discussions between economists, I think that you have misread people's motivations. Most people believe that they are underpaid. This even applies to those who are overpaid. (eg Investment Bankers: refer to Michael Lewis's Liar's Poker "You never get rich, you just achieve different levels of relative poverty") For most males their earning capacity is a major factor in their ability to attract a mate. Therefore males are in a constant battle to appear wealthier than they are, in the same way the most females are in a constant battle to appear younger than they are. Not disclosing your real salary is, therefore, an evolutionary imperative. Economics does not come into it.Comment originally posted on February 6, 2007 5:25 AM

On January 8, you <a href="http://www.economist.com/debate/freeexchange/2007/01/wealth_and_class.cfm">told</a> the world that "my income is almsot certainly below that of [a US airport] security screener". Today, you tell us that "I would sooner disclose my weight, body fat percentage, and Grandmother's secret pound cake recipe, than tell my coworkers what I make". I'm more inclined to believe the second than the first, I must say -- unless, of course, the two blogs were written by two different Anonymouses... I think the answer has everything to do with the fact that everyone thinks they're above average, and that therefore everyone has a tendency to think they deserve an above-average salary. So if salaries are disclosed, most people will think they're underpaid: they'll always compare their own pay to that of someone making more, and never to that of someone making less.Comment originally posted on February 5, 2007 3:59 PM

This is an excellent discussion. Here are two more points, perhaps omitted until now: 1) Open salary disclosure could increase friction between workers who can now differentiate themselves by a number, eg, "Why is so-and-so getting 2% more than me?" These comparisons lead to unhappiness that we avoid now through willful ignorance. Of course, after an adjustment (mental and temporal), one could get over this problem, as we do when test scores, batting averages, height, etc. are openly posted. In the mating game, knowing salary could *help* potential partners sort the whet from the chaff. Only the fakers -- surely a minority -- would lose out. 2) In the US, the BLS makes a survey of wages for ALL occupations, divided by area. Interesting reading: http://www.bls.gov/ncs/home.htmComment originally posted on February 6, 2007 6:29 PM

You obviously think as an employee, and one unaware of his class interests. Employees that compare salaries end by realizing they are being exploited and will form alliances for collective bargaining. Every employment contract I signed specified that salaries were confidential and should not be revealed. There was always some item that I was made believe it was personal and exclusive, making me feel that by revealing it to my co-workers I was risking losing it. Even brilliant economic journalists would be in average be better off by negotiating their salaries through an union, but then, not one of them feels he is "average". Comment originally posted on February 8, 2007 9:22 AM

Another thing to consider is that companies underpay high performing junior staff, such as recent graduates (because they can), and overpay average performing senior staff (because they have had years of pay increases). To avoid de-motivation companies have to give pay increases each year for seniority, but they typically, outside of a few industries (i-banking, consulting etc.) or great companies (GM?), give such low performance based increases that the sum of the seniority based increases are the dominant effect. Comment originally posted on February 6, 2007 10:48 PM

I think Namior is right. There is clearly an externality in sharing your salary information: in most contexts, it has a (social) cost to you, payable immediately. The benefit is achieved if everyone (including people outside your firm) discloses salary information, possibly with other performance information (rankings, etc). So it is the same "tragedy of the commons", which employers benefit from. This externality is resolved in places where: 1. The social cost is low because people will more easily admit that they are money-driven and better accept pay-for-performance schemes: law firms, trading firms 2. The benefit of doing so is high: if gross margins are high and talent is scarce (finance, law), workers are able to extract quite a lot of value by doing so. What is interesting is whether US doctors reveal salary information? To your point, Namior: I think that online disclosure of salary information is clearly a solution to this market failure, the only risk being that of bias in employee's submissions, or employers gaming the system. Comment originally posted on February 6, 2007 5:05 AM

How about a cooperation problem? Information sharing in this case might be a public good. If I share my information but no one else does, my payoff is 0 minus the cost of sharing. It is clear that it is a dominant strategy not to share. If players cooperated, everyone would be better off. In such a case, forcing disclosure might be a good idea. In fact, governments sometimes try to fill gaps in labour market information by disclosing average pay for different level of education and type of careers. What I don't understand is why there is not already a website providing such information for other industries than law firms in NY! It seems like something that would gather an interesting level of interest. Comment originally posted on February 5, 2007 10:46 PM

I'm a great deal more vitriolic normally on the subject of the measurements of the gender gap itself and the way in which the Equal Opportunities Commission twists them but that's perhaps a matter for another day. My ire with the Tories in this specific instance was toi do with the fact that they don't seem to know nor care how those numbers are twisted. Comment originally posted on February 5, 2007 7:18 PM

Salary silence may allow better matching of pay to performance. People come in a variety of abilities and all work with different levels of effort, leading to a distribution of productivities. Profit maximisation dictates that people be paid the value of their marginal product, but we have a strong social norm of discomfort with significant inequality, which would provide pressure for a more evenly distributed pay schedule. The fact that an employee's individual productivity is not known perfectly also requires that the management take their best guess. This uncertainty combined with people's sense of risk aversion and, as you mention, the fact that we all tend to think that we are above average, would lead the less productive to demand more equal pay. This would particularly be the case if the productivity distribution were non-symmetric, with a longer tail to the higher productivity. The down-side to this (from the perspective of employees) is that they cannot easily compare their salary to that of equally productive people in the same industry to ensure that they're being paid their true market value. You would therefore expect lower salary variance for a given level of productivity in occupations with higher turn-over of staff (better sharing of salary information between the employees) or when the industry they work in enjoys monopoly power (because the firm cares less - it has the power to set the price). This last point would fit with the example of NY lawyers .. the elasticity of demand for law services will be very low in NY, meaning that the firms charge their young lawyers out at the same hourly rate irrespective of their productivity.Comment originally posted on February 5, 2007 11:44 PM